SEBI Regulations & Guidelines on Buyback of Shares

In order to protect the interest of investors in securities, SEBI has listed down regulations that a company must adhere to for buyback of shares. Read to know the SEBI guidelines on share buyback

Publish Date: February 19, 2018

By: Sandhya Kannan, Head – Content

Buyback of shares is a part of the trading and investment journey. Many prominent companies such as TCS, Infosys, and L&T have opted for a share buyback in the past. Here are the reasons for entities taking such a step and the SEBI guidelines on share buyback that a company must follow.

What is Share Buyback?

Share buyback is also known as share repurchase. A buyback is a mechanism through which a company buys shares back from the market. A buyback can either be done through open market purchases or through the tender offer route.

Under the open market, the firm buys the shares back from the secondary market, whereas, under the tender offer, shareholders can tender their shares during the buyback offer.

Why Companies Opt for Share BuyBack?

Buyback of shares is used as a method of financial engineering. Companies buy back shares for a number of reasons, some of them are as follows:

When a firm has substantial cash resources, it may like to buy its own shares from the market, especially when the prevailing rate of its shares in the market is much lower than its true value.

In an environment where the threat of corporate takeovers has become real, share buyback acts as a defense mechanism for an entity. It safeguards against a hostile takeover by increasing promoter’s holdings.

In the process of mergers and acquisitions, corporates make subsequent use of share repurchase without increasing their capital base.

When a company plans to opt for buyback of shares, it needs to adhere to certain guidelines outlined by the SEBI.

What is SEBI?

The Securities and Exchange Board of India (SEBI) regulates the securities market. It was formed in the year 1988 and received statutory powers under the SEBI Act, 1992.

The main functions of SEBI include the designing and meting out certain rules and regulations in order to make the market a safe place for investment. The main regulatory function of the Security and Exchange Board of India is to ensure effective management of the stock market.

The SEBI has recently revised the buyback regulations. Here are the latest SEBI guidelines for buyback of the shares:

SEBI Guidelines for share buyback

1. Maximum limit of share buyback

Paid-up capital and free reserves of the company are important factors in any share buyback. The amount of money received from the shareholders in exchange for stock constitutes the paid-up capital of a company. Free reserves include reserves, except those pre-specified in the Companies Act 2013, that a company may use freely for distribution of dividend.

The SEBI guidelines indicate that the upper limit of share buyback is 25% or less than the total of the paid-up capital and free reserves of the company.

2. The ratio of the aggregate of secured and unsecured debts

Share buyback is not approved by the SEBI, if the ratio of the aggregate of secured and unsecured debts of a company are more than twice the paid-up capital and free reserves.

For example, a company has paid-up capital and free reserves amounting to Rs. 1,00,000 and secured and unsecured debts amounting to Rs. 2,50,000. This company has proposed buyback of 1000 shares at Rs. 100 each, which will amount to Rs. 1,00,000. In this case, the buyback will not be approved by SEBI because the debt-to-equity ratio of the company will exceed 2:1 post buy back.

3. Fully paid back securities

As per SEBI guidelines, buy back of only fully paid-up shares and securities is permitted.

4. Share buyback for decreasing share capital

Typically, share cancellation and share repurchase are two methods for reducing the share capital of a company. As per SEBI norms, no company has the power to buy back its shares unless the consequent reduction of its share capital is effected under section 67 of the Companies Act, 2013.

5. Modes of buyback:

The buyback of shares can be done via the following means:

(a) Free reserves- If the buyback of shares is made from free reserves, a sum equal to the nominal value of shares must be transferred to the Capital Redemption Reserve.

(b) Securities premium account- This is the extra money obtained when a company sells shares above their fair value. The money in this account can be used for share buyback.

(c) Proceeds of an earlier issue- A company cannot buy back its shares/securities out of the proceeds of the earlier issue of the same type of share/securities.

6. Restrictions on the purchase of own shares or securities

As per SEBI norms, a company may not be allowed to purchase its own shares through any subsidiary company and any investment company.

Also, a company with an unhealthy liquidity position may not be permitted to buy back own shares. That is, companies which have defaulted in:

- Repayment of fixed deposits or interest on these deposits taken from investors or individuals,
- Redemption of debentures or preferred shares, or
- Repayment of term loans or interest

from banks and any financial institution or banking company will not be allowed to buy back shares.

7. Approval for buyback

The company shall not authorise any buyback unless:

a) The buy back is authorised by the Articles of association of the Company
b) A special resolution has been passed in the general meeting of the company authorising the buy-back. In case if it is a listed company, then the approval should be made by means of a postal ballot.

Moreover, the buy back shares should be free from the lock-in period. If the quantity of buy back is equal to or less than 10% of the paid-up capital and free reserves, then the buy back can be made by a Board resolution.

8. Max tenure to complete the buyback process

The process of buyback of shares shall be completed within a period of 1 year from the date of the passing of the resolution by the board of directors of the company.

9. Clarification on the timeline for a public announcement

The company authorised to do the buy back of shares shall make a public announcement within two working days of its declaration.

Two days will be from the date of declaration of results of the postal ballot in the case of a special resolution or the board of directors resolution.

10. Completion of the buyback

Within 30 days of completion of the buyback of shares, the company shall file a return containing particulars relating to the buyback with the Registrar of Companies and the Board according to the format specified in the Companies Act, 2013.

11. Seeking shareholder’s approval

Two types of resolutions, namely an ordinary resolution and a special resolution, are involved in obtaining approval for buyback from the shareholders. An ordinary resolution is where at least 51% members are in favor, and a special resolution is where at least 75% members are in favor of the buyback.

An ordinary resolution is sufficient when the buyback amounts is up to 10% of the total paid-up equity capital and free reserves of the company, but a special resolution needs to be passed when the buy back amounts to 25% of the total paid-up capital and free reserves.

12. Model of dispatch

a) The company shall dispatch its Letter of Offer through electronic means in accordance with the provisions of the Companies Act, 2013.

b) A physical copy of the Letter of Offer should also be provided on receipt of the request from any shareholder to receive such a copy.

13. Participation of an eligible public shareholder who does not receive the tender offer/offer form

To safeguard the interest of the bonafide shareholders, an eligible public shareholder who does not receive the tender offer or offer form, can participate in the buyback and tender shares in the manner as provided by the Board.

14. Rights of an unregistered shareholder to participate in the buyback process

To safeguard the interest of the shareholders, an unregistered shareholder may also tender his shares for buyback by submitting the duly executed transfer deed for transfer of shares in his name, along with the offer form & other documents as

15. Rights of an unregistered shareholder to participate in the buyback process

To safeguard the interest of the shareholders, an unregistered shareholder may also tender his shares for buyback by submitting the duly executed transfer deed for transfer of shares in his name, along with the offer form & other documents as required for transfer.

16. SEBI’s power to allow tendering of shares and settlement of the same through the stock exchange mechanism

SEBI has introduced a stock exchange mechanism for tendering and settlement of shares through stock exchanges.

So, the companies shall facilitate the tendering of shares by the shareholders and settlement of the same through the stock exchange mechanism in the manner as provided by the Board.

Where a company buys back its shares/specified securities under this section, it shall maintain-

- a register of the shares/securities bought,

- the consideration paid for the shares/securities bought back

- the date of cancellation of shares/securities

- the date of extinguishing & physically destroying the shares/securities and such other as prescribed in sub-section (9) of section 68 of the Companies Act, 2013.

17. Interest-bearing escrow account

In order to ensure that the merchant banker’s funds are available at the time of making payment to shareholders, the cash component of the escrow account shall be held in an interest-bearing account.

18. Deletion of certain provisions

All provisions related to:
a) Power of the Board to order an investigation
b) Duty to produce records, etc.
c) Submission of report to the Board, under Regulation 1998, have been deleted.

Conclusion

A share buyback can be an effective way to boost up an entity’s undervalued share price and reduce dilution. It is not necessary that every share buyback will benefit shareholders.

So, it’s always advisable to check the company's historical track record, and then take a wise decision.

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